S2N Spotlight
Since Monday I have been building a base case to provide some forward guidance as to where I think the US stock market is headed. If the biggest names in the business can get it so wrong with their forecasts, I certainly don’t need to be bashful with mine. However, I am definitely not going to put a number to it.
My views are mainly driven by valuation and my passion for extreme contrarian wave surfing.
There are many different valuation methods one can use; I like to keep it simple, and yes, I am quite aware that earnings are more convoluted with today’s accounting standards than the disclaimer at your local skydive school.
Because I am old-fashioned, I will start off with a traditional historic PE valuation. Hmmmm, looking like the expensive side of town.
Now for something a little more sophisticated but far more robust, we look at the Shiller PE, or the CAPE 10, which focuses on using the trailing 10 years of earnings to calculate the PE. This takes the ups and downs of earnings into account (profit margins are known to be mean reverting). Golly gee, we are expensive.
To complete the Shiller PE valuation methodology, let us look at how stocks perform over the next 10 years relative to their Shiller PE at the beginning of the 10-year cycle. This is when some of you might climb up on the ledge. In the chart below I have created a simple linear regression where it suggests we are likely to experience negative cumulative growth over the next 10 years.
I mentioned my penchant for contrarianism at extremes. The last 2 years have produced a pretty rare pop above 1 standard deviation from the mean. You can see that there is a tendency to mean revert, so this is yet another one of my forecasting factors.
Finally, I like to look at charts. I typically like to look at my charts naked. I don’t mean me being naked; I mean naked from all the lines and indicators that I mostly find “noisy.” However, when pulling a long chart from my library, this one caught my eye, so I have decided to include it.
My concluding thoughts and prediction. There is a real possibility that we make one more new high in the next few months. If we get it, I think it will be short-lived, and the reality of living with higher inflation and the burden of servicing the debt will take its toll. By the end of 2025, maybe well before the end, we will be in a bear market, i.e., a 20% correction from current levels.
S2N Observations
The letter is long, so I will leave my observations for another day. I will say that the yield on bonds in Japan and the US is climbing to levels that the cost of servicing interest is likely to become the government’s single biggest expense item. This is going to bring a whole level of pain we cannot yet imagine.
S2N Screener Alerts
Platinum had a -2 sigma down day.
The British Pound versus the Singapore Dollar was down for the 6th day in a row. Long live the king.
Performance Review
For those who are new to the letter, the shading is Z-Score adjusted so that only moves bigger than usual for the symbol are highlighted.